China’s inflation remains below government target

The People’s Bank of China’s 50 -basis-point cut to the reserve requirement ratio for selected rural and city banks was announced late on Monday.
Photo: Reuters

by
Lisa MurrayAFR correspondent

Shanghai China’s consumer prices posted their biggest increase in four months during May, easing fears the world’s second-largest economy was slipping into a period of deflation.

While economists are still concerned about sluggish domestic demand and a drop in property investment affecting China’s growth rate this year, the latest inflation report suggests the economy may be stabilising.

Consumer prices rose 2.5 per cent compared with a 1.8 per cent increase in April, slightly stronger than expected, pushed up by the rising cost of fruit and pork. Meanwhile producer prices, which have been falling for 27 straight months, dropped by 1.4 per cent, the smallest decrease in five months.

Deflation pressures have eased “across the board," said HSBC economists Qu Hongbin and Julia Wang. However, they added, “the economy still has some way to go before growth momentum picks up sufficiently to achieve the growth target this year".

China is forecasting its economy to grow about 7.5 per cent this year, which would be its slowest pace since 1990.

Premier
Li Keqiang
has repeatedly ruled out a big-spending stimulus, similar in scale to the one introduced in 2009 during the global financial crisis.

Central bank to aid farmers, small businesses

Still, consumer inflation is comfortably below the government’s annual target of 3.5 per cent, allowing policy makers to introduce a raft of targeted stimulus measures. On Monday, China’s central bank said it would cut capital requirements for banks lending to farmers and small businesses.

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The government has also started spending more on railways and affordable housing in a bid to offset the recent drop in construction and property investment activity. However, there is some concern China’s targeted approach to boosting growth may not go far enough. The property market in China has been one of the biggest drivers of growth in the past three decades, underpinning strong demand for Australia’s iron ore. Its current slide is posing the biggest risk to growth this year.

Meanwhile the government is focused on smaller sectors of the economy such as agriculture and small business. China said on Monday it would bring into effect a targeted 50-basis-point cut to the reserve requirement ratio (RRR) for selected rural and city banks on June 16. The central bank stopped short of a broader easing of monetary policy.

ANZ economists Liu Li-Gang and Zhou Hao described the move as a compromise between the People’s Bank of China and the State Council, which is reportedly concerned about the slowing economy. As the effect of the selective RRR cut is equivalent to injecting between 70 billion yuan and 100 billion yuan ($12 billion and $17 billion), ANZ said the move’s impact was “limited".

“As the major banks are still subject to the 20 per cent RRR, the cost of borrowing will remain high," ANZ said in a note. “Without a broad-based RRR cut, the central bank cannot convey a strong signal to the banking sector on a changing monetary policy direction."

This is the second targeted RRR cut since April and was flagged by the State Council at the end of May.